September 20, 2012

Oil Exploration in the Arctic: Is the Obama Administration Really Interested?

September 20, 2012

Shell has spent around $4.5 billion to explore for oil in the Chukchi and Beaufort Seas in the Arctic,[i] which according to the U.S. Geological Survey, has more than 90 billion barrels of recoverable oil and nearly 1,700 trillion cubic feet of recoverable natural gas.[ii] After years of delays from the Obama Administration, the company was allowed to move forward with “certain limited preparatory activities in the Chukchi Sea”, according to the Bureau of Safety and Environmental Enforcement (BSEE). The BSEE stated[iii]:

“Today’s announcement authorizes Shell to move forward with limited activities well short of oil-bearing zones that can be done safely now prior to the certification and arrival of the containment system.”

BSEE engineers conducted an initial inspection of Shell’s containment system, but the company was waiting to receive final certification from the Coast Guard, the final approving authority. However, most recently, Shell encountered a damaged containment dome, reducing its drilling exploits this summer to the tops of wells due to impending weather issues and a much shortened season imposed upon them by the Department of Interior.[iv] The delays and regulatory hoopla that Shell has undergone to drill for oil in the Arctic has made other companies wary. Statoil, a Norwegian oil and gas company, for example, has announced it is delaying plans to explore for oil in the Arctic until after 2015 due to Shell’s regulatory challenges.

Let’s examine the hurdles that have confronted Shell’s exploratory drilling in the Arctic.

Shell’s Arctic Experience

Shell spent $2.1 billion for its tracts in the Chukchi Sea in a 2008 lease sale, and was prepared to start drilling during the summer of 2010.[v] But the oil spill accident in the Gulf of Mexico that April resulted in a moratorium on all offshore drilling, in both shallow and deep waters, by the Obama Administration. According to Shell, there is less of a risk of a blow out in Arctic waters for two important reasons. First, drilling in the Arctic is in only 150 feet of water compared to 5,000 feet at BP’s Macondo well. Second, the Arctic wells will tap into reservoirs that are under less pressure.[vi] This means that a blowout is much less likely and if there is a blowout, it is much easier to control in 150 feet of water than under the crushing pressure at 5,000 feet.

Shell lost the entire 2011 drilling season because the EPA’s Appeals Board overruled the EPA on an air permit it had approved for sources of emissions from ships 70 miles from human habitation, even though ships have never been considered stationary sources of emissions for purposes of securing a permit.[vii] This was after a study demonstrated that energy development in the Arctic would generate almost $200 billion in government revenue over 50 years, while creating almost 55,000 jobs nationwide over those same 50 years.[viii]

Shell has had to secure around 35 permits each year from various agencies in order to proceed to drill. The company has routinely exceeded many of the requirements of the government in order to ensure safe operation. For example, Shell has taken a number of precautions to prevent a blowout: it has outfitted the blowout preventer on the Kulluk, a 266-foot ship with a hull reinforced for ice, with a second set of shear rams that could shut down the well in case the first set fails; it has engineered a backup cap-and-containment system similar to the one that stopped the BP blowout; and it will have oil-spill response vessels and other equipment in the Arctic that could support a cleanup in the unlikely event that one is needed.

In late August 2012, Shell finally received permission to begin work on a well in the Chukchi Sea, about 90 miles off the Alaskan North Slope. The Obama administration gave Shell permission to start “certain limited preparatory activities,” including work related to the installation of a blowout preventer, on August 30. [ix] No access to subsurface areas which might contain hydrocarbons was permitted.

Nonetheless, the Federal Government is keeping a close watch on Shell’s endeavors in the Arctic. The BSEE has federal inspectors stationed around the clock on Shell’s Arctic rigs. Director of the BSEE, James Watson, said “BSEE will diligently review and monitor Shell’s proposed activities at each stage to ensure they remain compliant with federal regulations and are performed in a safe manner.”[x] Greenpeace is also monitoring Shell’s exploration activities in the Arctic using the Esperanza, a vessel that is carrying submarines to explore the sea bottom near Shell’s oil rigs. An Alaskan judge has ordered Greenpeace to stay at lease a kilometer away from Shell’s drilling rigs.

Shell’s original plan was to drill 5 wells during the summer of 2012—2 in the Beaufort Sea off the northern Alaska coastline and 3 in the Chukchi Sea off the northwest coast between Alaska and Russia.[xi] Their drilling plans were diminished due to weather and sea ice, regulatory hurdles, and law suits from environmental organizations to the point where Shell will not be able to drill for an oil well this summer, but rather will drill for the top portion of wells, “top holes”.[xii] Their most recent setback was a damaged containment dome, which while it can be fixed, cannot be done in time to drill before their government-ordered shortened season stops them from completing a well this year. Over the years, Shell has had to deal with over 50 law suits from environmental organizations. Shell had planned to spend $1 billion on its exploratory drilling efforts this summer.[xiii]

Recently, Shell had to move one of its drill ships and support vessels safely away from approaching sea ice the day after it began drilling. The drill ship, the Noble Discoverer, is expected to resume its position and drilling operations over the ‘Burger A’ prospect in the Beaufort Sea once the fall whale hunt is concluded and the company receives a top-hole drilling permit.[xiv]

Other Oil Companies with Interests in the Arctic

Statoil, a Norwegian oil company, spent $23 million to acquire exploratory rights in 66 tracts of the Chukchi Sea in a 2008 lease sale. It had originally planned to begin exploratory drilling 120 miles off Alaska’s northwest coast on its Amundsen Prospect, but is delaying its plans until after 2015 due to the regulatory challenges that have confronted Shell.

Conoco Philips acquired 98 leases in the 2008 sales, paying the government $506 million. The company plans to begin exploratory drilling on the Devil’s Paw prospect in the Chukchi Sea in 2014 and submitted an oil spill response plan in February and an exploration plan in March to federal regulators. Neither plan has been approved as of yet. In 2008, Conoco started a scientific study program to evaluate fisheries, seabirds, and marine mammals in the Chukchi Sea which Statoil and Shell helped fund.

Trans Alaska Pipeline System

The Trans Alaska Pipeline System (TAPS) is a 48-inch diameter, 800-mile long crude oil pipeline that moves oil produced on Alaska’s North Slope to the Valdez Marine Terminal, where the oil is then shipped by tanker to West Coast refineries. It is currently the only means of transporting North Slope crude oil to West Coast markets. Production in the Alaskan North Slope has been declining since 1988 when oil production peaked at 2.0 million barrels per day. To remain operational, TAPS needs to maintain throughput above a minimum threshold level. Low flow rates on crude oil pipelines can cause operational issues, particularly in the frigid Arctic. [xv]

The following problems may occur to TAPS if oil production declines below 600,000 barrels per day: potential water dropout from the crude oil, which could cause pipeline corrosion; potential ice formation in the pipe if the oil temperature were to drop below freezing; potential wax precipitation and deposition; and potential displacement of the buried pipeline due to soil freezing and thawing, as pipeline operating temperatures decline. Other potential operational issues at low flow rates include: sludge drop-out, reduced ability to remove wax, reduction in pipeline leak detection efficiency, pipeline shutdown and restart, and the running of pipeline pigs that both clean and check pipeline integrity.

The severity of potential TAPS operational problems is expected to increase as throughput declines; the onset of TAPS low flow problems could begin around 550,000 barrels per day. In 2011, North Slope production averaged 562,000 barrels per day, dangerously close to the 550,000 barrel per day threshold. As the types and severity of problems multiply, the investment required to mitigate the problems is expected to increase significantly. Considerable investment may be required to keep the pipeline operational below 350,000 barrels per day because of the number and diversity of operational problems expected at this level.

Shell’s Arctic exploration could help TAPS if Shell were to invest in a 400-mile pipeline to move oil from the Chukchi Sea across the North Slope to TAPS. That, of course, is dependent on the government providing Shell and other companies with a regulatory environment conducive to explore for oil and to invest in a connecting pipeline.[xvi]

Conclusion

The Obama Administration says that it is supportive of drilling in the Arctic, but its regulatory challenges from the Department of Interior, the Environmental Protection Agency, and the Coast Guard have slowed Shell’s ability to explore for oil this summer, reducing the company’s best efforts to producing top holes. It is difficult enough to explore for oil in the Arctic where weather and sea ice are major factors, but regulatory hoops make it just that much more difficult. These regulatory challenges have postponed plans of other oil companies to invest in Arctic oil exploration that has cost Shell $4.5 billion already without one well drilled.

Besides from benefiting from the oil that Shell can produce, U.S. consumers would benefit from a functioning TAPS that is facing operational problems due to low flow rates from declining North Slope oil production and the Obama Administration denying lease sales to oil in the Naval Petroleum Reserve – Alaska and the Alaska National Wildlife Refuge. As the United States’ gateway to the Arctic’s vast energy resources, Alaska could aid in the energy renaissance that is rapidly transforming the future energy picture for the nation. Alaska’s inability so far to contribute to that future can be placed at the feet of a federal government whose words seem to differ significantly from its works.